The coronavirus crisis has highlighted existing problems in the supply chain. Does it herald the end of just-in-time management? The answer is currently unclear but the system will have to adapt to be able to respond to unexpected peaks and the e-commerce boom. There’s no way round it: this will involve creating more urban warehouses, as part of mixed-use projects.
As has been previously discussed, Covid-19 has had major consequences for the retail sector. Consumer behaviour is changing, as is WHAT and HOW we consume.
By extension, these trends also have an impact on the entire supply chain. This unprecedented period, which has seen an explosion in e-commerce and demand in certain industries, has highlighted the problems associated with the way in which the supply chain currently works.
The limitations of just-in-time management
Today, the recommended logistics model is just-in-time management, which is supposed to optimise production while reducing costs and lead times. In this system, stock levels are reduced to a minimum to reduce the costs of warehouse storage; this leads to on-demand production which is increasingly customised.
Just-in-time management works wonderfully when:
- there is significant production capacity for the production of orders at short notice, even during peaks in demand;
- there are no significant incidents (technical or human) which slow things down;
- there is expert monitoring of (possibly numerous) suppliers and/or subcontractors;
- there is an efficient and unhindered transport system.
The fragility of the system is underlined by the sheer number of factors involved. But coronavirus has caused significant disruption on all fronts: unexpected peaks in demand for certain products, a sudden e-commerce boom, closed borders which have prevented the movement of workers and goods, record absenteeism and much more. This period has been a real test of all the players in the supply chain.
Solutions for a more resilient supply chain
It’s certainly been a real test, but it hasn’t been very satisfactory. Nevertheless, we see it as a great opportunity to learn, to improve and to specialise, both for logistics titans, like Amazon or Decathlon with their numerous and increasingly automated warehouses, and for smaller players who will be prompted to share solutions with others.
Over the last few months, several options have emerged, based on the lessons learned during the coronavirus crisis:
- A (partial) relocation of production: this is primarily a recommendation for key industries and/or industries which have become completely dependent on foreign suppliers, mainly in China. Components for electronic equipment, active ingredients for medicines (60 to 80% of which are currently said to come from Chinese and Indian suppliers): these are examples of products for which there is a real risk of disruption to the supply chain. There are increasing calls for at least a partial relocation of production so that there is least one viable alternative in the event of a crisis.
- Building up more stock: not doing so means risking stock shortages in the event of the slightest incident, thereby jeopardising the customer’s trust.
- Optimising last mile delivery: the “last mile” is the last part of the product’s journey from the supplier to the customer. This last mile is the most expensive – it currently accounts for 20% of the delivery cost (source). What’s more, it causes multiple problems in city centres: huge numbers of lorries and vans, some of which are half empty when supplying shops and, increasingly, delivering parcels to customers’ homes, exacerbate traffic jams and worsen pollution. In Brussels, for example, Brussels Mobility observed an increase of 10-15% in the number of vans entering the city every morning in 2017 to 2018, in comparison to 2012. In the same year, it was noted that personal accidents involving vans increased by 4.3% in the Belgian capital (source).
Urban warehouses to better organise flows
The issues of storing stock and last mile delivery are inextricably linked. The rise of e-commerce will force us to find innovative solutions which accommodate the needs of online consumers, who want fast, low-cost delivery, and the aforementioned negative consequences of such developments.
We believe that the creation of a network of urban warehouses is vital. Governments seem to have become aware of this and now realise that, just as with the construction of additional schools, care homes and hospitals, logistics is essential and will become even more important in the future!
They also understand that the logistics industry creates low-skilled jobs in towns and cities, where the need is greatest. Many of these potential workers find it difficult to travel to the outskirts, where large warehouses and logistics centres are often located currently.
As a result, various pilot projects have emerged, including the multi-modal urban distribution centre in Lille and Citydepot in Brussels. Although some of these projects are still in the early stages of development, they are set to play a key role in the future.
The logistics property market, an increasingly interesting investment
And what about the private sector? Until recently, few developers/investors were really interested in the logistics property market, because it was less profitable as an investment than those in residential, retail or office property.
Could coronavirus change things? It has already boosted the logistics property market. In the two months following lockdown, demand for storage space increased by 30%. Indeed, the occupancy rate of these spaces is almost 100% today.
And although 2020 is a unique year, we are convinced that the logistics property market will continue to develop as a direct consequence of the growth of e-commerce and the realisation that it is imperative to build up stock.
Growing demand, a vacancy rate close to zero, stable rents: there is no doubt that the logistics property market is sure to become an increasingly attractive investment.
Logistics at the heart of functional mixed development
Lastly, the logistics industry can regenerate (peri-)urban areas at the entrance to towns and cities and even within towns and cities. We’re certainly not saying that the industry’s buildings should be exclusively dedicated to logistics. Firstly, buildings will have to increase in height for greater efficiency.
Secondly, logistics buildings will also have to be integrated into functional mixed development, in the same way as shops, leisure activities and offices. This could make it possible to lower the cost of dedicated logistics buildings.
A good example? The Chapelle International project in Paris. Located on former railway wasteland, this 150,000m2 site includes housing, offices, public spaces and facilities and a 45,000m2 multi-modal logistics building with a railway terminal and a direct connection to the rail network.
Increasingly, logistics must be seen as an integral part of the urban fabric, rather than as an undesirable activity which is relegated to the outskirts. There are many examples of projects which reflect this, such as the Hema Market in Shanghai: proof that a large logistics building can also become an all-in-one destination, with a shop and a food court. And it works. We are confident that the future lies in clever mixed development projects.
Mixed development projects are all very well, but where should they be located and how can the needs of the local market be understood? We can help you.